Saturday, January 23, 2010

Adam Smith was not a localist

I've been waiting for this.

The logical fallacies of the "buy local" movement are ancient. Economist Louis Johnston of College of Saint Benedict-Saint John's University said they go back to the Middle Ages. It was only a matter of time before America's right-wing jumped on board.

This week on Glenn Beck's website, thriller author Daniel Suarez typed an unconvincing essay on why buying local will bring us all "economic sovereignty."

After a series of cherry-picked statistics and anti-corporate populism, Suarez decided to invoke a famous and influential economist to support his claims:

"But what if all that money didn’t flow into distant corporate coffers but instead stayed right in your region? The balance of power would be turned upside down.

"Regional self-reliance is more than a 'buy local' movement -- it's the cornerstone of democracy. In fact, it always has been. When Adam Smith wrote TheWealth of Nations in 1776, he was describing an economic system not of multi-national corporations, but of individuals who would act in their own self-interest—human beings invested in their community. If your region wants self-determination, they need to be able to say 'no' to distant power brokers, and you can’t do that if you produce none of the products and services that support life."

Adam Smith spent chapter three of book IV of The Wealth of Nations arguing the exact opposite of what Suarez and other localists believe. Under the cumbersome chapter title Of the extraordinary Restraints upon the Importation of Goods of almost all Kinds, from those Countries with which the Balance is supposed to be disadvantageous, Smith demolished one of the cornerstones of the mercantilist view. Smith believed that imports can make a nation wealthier.

Let's make sure we're all on the same page. Mercantalists believed that the wealth of nations was in its precious metals. They believed nations could become rich by exporting as many goods as possible in exchange for gold and silver, while importing as few goods as possible. Wealth meant a stockpile of shiny metals.

Frustrated with this view, Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. He argued that a nations wealth was in its resources, not its gold and silver, and sent mercantalism to the junkyard of history, next to magnétisme animal and metoposcopy.

The "buy local" argument is a proxy for mercantalism. Instead of gold and silver, localists believe the source of our wealth is in our dollar bills. But money is just a proxy for resources, and if you strip that layer away, you will see the flaw in their economic strategy.

Localists believe a community should export when possible and churn resources around in the community to generate wealth. They also oppose importing new resources into the community, and taking in only money.

This is a recipe for poverty, not wealth.

Let's look closer at one of Suarez's economic points.

"When Adam Smith wrote TheWealth of Nations in 1776, he was describing an economic system not of multi-national corporations, but of individuals who would act in their own self-interest—human beings invested in their community."

Adam Smith did write about why people prefer to buy from domestic companies instead of foreign ones, and why they will usually do so when prices are about the same. For example, in book IV, chapter two of The Wealth of Nations he said.

"...Every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock."

Smith did indeed list the gains from "buying domestic," but exclusively when the prices are nearly identical. Localists have never made this distinction, and have always advocated buying from nearby merchants even when costs are higher. Smith said no such thing.

However, saying people like to do something is not the same as saying people should do something. With Smith's wordy 18th century writing style, it's tempting to skim what he wrote without reading the full context. There are a few passages clustered around his famous "invisible hand" line that can sound like a localist, protectionist argument if read alone.

"It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers... If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage."

Smith did not argue for the same thing Suarez is advocating, nor should anyone who knows the impact from The Wealth of Nations believe he ever would. Using Adam Smith to argue mercantilist economics is like using Charles Darwin to argue Intelligent Design.

The opportunity cost is exactly why you should buy the best deal, and not just the local one. If we commit a chunk of our local labor force into food production when we could import it cheaply, then we have wasted that labor, and all the gains it could have brought us.

Because of specialization, economies of scale, and differences in labor rates, technology has not defeated comparative advantage.

The world of the "buy local" crusader is not a post-comparative advantage world. It is a world ignorant of comparative advantage.

I am curious why my anonymous friend started off with a pro-buy local argument and then added an anti-buy local fact about shipping costs - and with a transitional wording that implied the second point reinforced the first.

In a world where you cannot assume "cheap imports" (check out the lifetime of the Baltic Dry Index) retaining the skillset and knowledge required to generate stuff locally is a clear economic choice. It's those non-tangible assets that prove buying local is the cheaper choice. You lose that productive capacity every time you buy something from "away."

In fact, technology enables a community to retain comparative advantage. Which was my second point, technology is bringing the cost of shipping stuff from far away down to zero as a result of highly distributed fabrication. We don't need to ship if we can build.

I'll do my best here, but I feel that you've crammed a few pages worth of perspective into two paragraphs.

You're saying because buying local builds up production tech and skills in the area as a side effect, we should embrace it.

I'm afraid that isn't enough to turn down the benefits of international trade. If you believe that it is, then you've stepped outside the world of Adam Smith. It's OK to do that, but your earlier post implied you were operating within the Smithian world.

I want to make sure we're on the same page, "comparative advantage" is an important economic term and I'm not sure you understand it or are using it correctly. It's not that one region has it over another in general. Both regions can have Comparative Advantage over each other in specific industries. Cheap labor is a form, and technology can simply follow cheap labor.

A region that attempts "economic sovereignty" is an island to itself. It simply can't specialize in everything.

I'm afraid I still don't understand your point is bringing up my side's argument - that shipping is extremely cheap. Are you saying that it will be cheaper for us to export now? If so, you're at the gates of Mercantalism.